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Bravo Papandreou!

Greek Prime Minister Georgios Papandreou startled Europe and the financial world Monday by announcing that he will be calling a referendum on the terms of the latest deal negotiated by European leaders and bankers.

What is the Greek leader up to?

On one level, Papandreou is simply weary of being the agent of his own country’s economic destruction at the hands of bankers. He also is tired of the political unpopularity that comes with the role of broker of austerity.

(AP Photo/Thanassis Stavrakis)

Greek Prime Minister George Papandreou says his country will hold a referendum on a new European debt deal reached last week.

But more important, Papandreou is resisting a double-cross already being cooked up by the bankers. He is playing the one card he has: If the bankers walk away from the partial debt relief committed in principle at the recent EU summit, Greece will default. And Papandreou wants that decision to be made, knowingly, by the Greek people and not by technocrats.

Here is what’s happening behind the scenes.

Charles Dallara, negotiating on behalf of the bankers, agreed to a 50 percent reduction in the amount of Greek government debt held by banks (a “haircut”), but the bankers are already trying to take a much smaller loss by monkeying with the fine print. By varying the details of interest rates and payback periods, bankers could end up losing a lot less than 50 percent—and Greece could end up getting a lot less than 50 percent debt relief.

Bottom line, Greece could wind up right back in the austerity trap, where the more the Greeks tighten their belts to pay debt, the more the economy collapses under them.

Bankers have already quietly unloaded a lot of Greek sovereign debt to hedge funds, and it’s not clear what kind of losses hedge funds are willing to take.

Even if bankers and hedge funds do take the full 50 percent loss as advertised, the European Central Bank and the International Monetary Fund, which together hold about one third of Greece’s roughly 350 billion euro Greek debt, expect to be paid in full. The official agencies are set to help Greece in other ways, by advancing the Greek government additional funds through the new European bailout agency, the European Financial Stability Facility (EFSF). But this is … still more debt on terms yet to be defined.

Then there is the problem of Greece’s own banks and its pension funds, which hold nearly $70 billion of Greek debt, and also ordinary businesses in Greece that are reliant on bank credit. If an exception from the 50 percent loss is not made for Greece’s own banks, their capital will be wiped out. The deal is supposed to include new capital from the ESFS for Greece’s banks, but that is not a done deal either.

In the meantime, Greece is supposed to continue with its program of stringent austerity to reassure the bankers and Europe’s political mandarins. But with this latest deal negotiated last week, Greece’s bankers as well as its workers and street protesters began sounding alarms.

At some point, enough is enough, and if the terms turn out to be one more tightening of the noose, Greece could have less to lose by just defaulting. At least that is Papandreou’s not-so-tacit threat.

One can assume that the panic that rippled through Europe’s financial and political circles was about what Papandreou intended. I am reminded of a poem by e.e. cummings about a conscientious objector named Olaf, which includes the epic lyric, “There is some shit I will not eat.”

This, essentially, is what Prime Minister Papandreou is saying. If you want the Greeks to continue the belt-tightening, you cannot alter the terms of the deal by stealth.

By involving his countrymen in the decision, Papandreou turns himself from agent of foreign austerity demands into a leader of the Greek people. The referendum will be sometime this winter, after the true terms of the deal are clear.

Polls taken over the weekend show that some 59 percent of Greeks oppose what appear to be the terms of the latest deal, but over 72 percent want Greece to stay in the eurozone.

If the International Monetary Fund, European Union, and European Central Bank are as good as their word and hold the bankers to the terms that were negotiated, we can expect Papandreou to urge Greek citizens to ratify the bargain. If, on the other hand, political and financial elites try to wriggle out, then the Greek people can draw their own conclusions—and we will all be in the uncharted waters of a likely default by a eurozone country.

In the meantime, Papandreou is showing real leadership. It is about time someone stood up against the banker-led austerity consensus. Greece, after all is the cradle of democracy—and Papandreou is a socialist.

Despite its past sins of inefficient bureaucracy, Greece is the underdog here. In return for inflicting hardship on its own people, the Greek government deserves some real relief to allow its economy to grow again. But that’s not the kind of game bankers play when they are permitted to get away with it.

Greece now has the desperation power of the weak. Papandreou’s is a brave, nervy, high-stakes move, and one that deserves our respect.

Comments

While I want to laud your sentiments here, and have every desire to avoid being impertinent, Mr. Cummings never spelt his name without capitals and doing so posthumously, no matter how common (I've done it myself, in ignorance), can only be a insigne of disrespect.

Very nice analysis but as a Greek I would like to comment on the BRAVO to Papandreou. It is very late for Mr. Papandreou to become a leader, he is just a descendant of a Prime minister family that is the one leg of the diarchy that rules Greece for 50 years now (Karamanlis is the other one). Isn't it a little too late to try to act as a socialist? The last three years with his "no action" behavior turned Greece to an unprotected victim for the financial predators. Unfortunately, he didn't show any sign of resistance, he didn't use the fact that the Greek debt 3 years ago was more than 75% to externals, he didn't say one no, he was just trying to deceive the Greek people. He was elected by claiming that Greece has money and since then he is breaking every promise he gave. Sometimes he does exactly the opposite of what he promised in such a sort time period that makes you wonder if he is having a full brain capacity. You cannot claim that this person, now he decided to take over in order to ensure a plan that will lead us anyway to the point we've started, in 10 years time i.e. debt 120% of the GDP. I would agree that this last decision was taken in order to scare off the bankers that they realized that maybe they cannot afford the 50% haircut. Not only because of their exposure to the Greek bonds per say but because of the CDS exposures - especially the naked- and the interconnection between the Greek debt and the Spanish & Italian situation. Do not forget that German banks are not exposed that much to the Greek debt but they have a large exposure to the Italian. It is a dynamic system and we do not know where a Greek 50% haircut is going to lead. Thus, I believe that the decision was not, for one more time, Papandreou's but Merkel's who would like to apply the pressure as we need somehow to move forward. To me it is a little weird her under reaction to the Greek PM's decision. Anyway, the referendum most probably will never happen since it looks like that the Socialistic party looses majority in the parliament under the recent developments and most probably we are going to have elections. In the non probable case of a referendum do not be surprised if you'll face an 80 to 90% NO vote. I do not think that the media will be able to manipulate the public opinion again. Think of the 1.000.000 unemployed Greeks; with zero bank accounts and no job, they have nothing to lose. And this is going to lead us to interesting times. Greeks are proud and are going to react not as cold blooded, rational central Europeans but as over tempered heroic Greeks.
"Hence we will not say that Greeks fight like heroes, but that heroes fight like Greeks", Sir Winston Churchill
"First Greece taught us that free men can be brave, and that no defeat is meant to last forever. This small nation proved to be worthy of its history", Albert Camus

True, and it invented democracy precisely to deal with a debt crisis. And that debt crisis makes the point that what is necessary as a precondition for democracy is seisaktheia, a "shaking off of burdens". The oligarchs who had ruled ancient Athens before the debt crisis that their depredations created, had both their power taken away by the creation of democracy, and their debts repudiated.

Seisakhtheia, then democracy. Greece is also the cradle of debt repudiation, and this seisakhtheia is the older, more fundamental, of the two siblings.

Prime Minister Papandreou, to serve his own political ends, has given the Greek people the opportunity to choose between long term hardship and sticking others with the bill, which comes to $310 billion. Is there any doubt, the Greeks will do the right thing by telling the EU, ECB, IMF, ECSF and European Banks to take a flying leap. Every drachma not paid to repay foreign debt is another drachma that can be spent for Greeks.

The Euro which enabled Greeks to go on a spending binge for benefits they could not afford, is currently choking the life out of the Greek economy. By going back to the drachma, Greece can undergo a currency devaluation which will lower the price of Greek exports abroad.

In the ancient world after the fall of Troy, it was said to beware of Greeks bearing gifts. In the modern world, it may now be said: Beware of Greeks issuing bonds. For international financiers, Greek bonds seem to have become the modern day equivalent of the Trojan horse.
Just last week Germany and France were congratulating themselves for having accomplished a diplomatic coup by engineering a rescue of the EU financial system including a 50% reduction in the repayment obligations of Greek bonds. The so-called Greek haircut, in turn, required Greece to enact fiscal policies likely to reduce many Greeks to abject penury.
A mere week later and the diplomatic coup is beginning to resemble the economic equivalent of Neville Chamberlain’s “Peace in our Time”, the pitiful failed effort to avert a war with Hitler’s Germany. In a shocking turn of events, Prime Minister Papandreou has announced a referendum on the financial rescue plan no one had anticipated. It will probably be held in January. Greeks will be asked whether or not Greece should become a nation of beggars. For those European leaders who frantically mounted the Greek rescue effort, it must seem like a nightmare where the dog bites the hand that feeds it. Who ever thought the Greeks needed to be asked whether or not they wanted to be rescued by the EU?
Preliminary polls indicate that about 60% of Greeks oppose the austerity measures the EU wants imposed. The likely outcome of the vote will be that Greece will politely invite the EU to take “a flying leap” by rejecting fiscal austerity, reintroducing the drachma thereby exiting the EU currency union and the EU itself and defaulting upon Greek sovereign debt in its entirety.
It seems the other 16 European member nations of the EU somehow forgot the traditional Greek practice of “ostracism”. This enabled the citizens of Athens to exile any citizen for unpopularity. By majority vote, any citizen could be sent into exile for ten years without the citizen having committed a crime or infraction of civil law. Greeks seemed to be poised to vote to ostracize the EU rather than face the consequences of the financial rescue engineered by European diplomats. All this may be the best approach to recapitalizing the Greek economy in the long run. Nevertheless, its financial consequences may leave hell to pay for the European banks and Wall Street.

Congratulations for your in-depth analysis. Time has come for Greece to get out and follow its destiny. How on-earth someone can expect a 17 (27)- multiculture coalition to work it out. It is simply not possible. In my opinion Greece should establish extremely close cultural, financial and commercial relations with United States of America. History shows that the people of both countries can communicate and understand each other, unlike e.g. Germans or Czechs. Greece is not Iceland. United States will not leave Greece to fail and we surely do not need Europe at all. As I'd said to my students once: ' My mom -who's 75- wakes at 05:00 am to watch Opprah's show and comment along with her friends in the morning coffee' . Can you imagine her doing this with a german or italian show? No thanks

About the Author

Robert Kuttner is co-founder and co-editor of The American Prospect, a professor at Brandeis University's Heller School, and a distinguished senior fellow of the think tank Demos. He was a longtime columnist for Business Week and continues to write columns in TheBoston Globe. He is the author of Obama's Challenge and other books.